Gold prices have taken a beating since the yellow metal reversed at 2016 resistance in April, dropping more than 125 points to the lowest low since December 2017. Aggressive action by the Federal Reserve on interest rates has driven the decline, with bearish sentiment reinforced by a looming trade war. Fortunately for bulls, it's fallen too far too fast and is now sitting at a support level that should offer long-side trading profits through the summer months.

This is a trading call rather than a buying recommendation because the decline incurred technical damage that could mark an eventual top and downtrend. It will now take a rally above the first quarter high to ease that headwind, which seems unlikely given the Fed's ambitious rate hike schedule. However, a trade war could play with inflationary fire, triggering supply disruptions that lift commodity prices to 21st-century highs. If so, gold could break out in the coming years and head toward $2,000 per ounce. (See also: 8 Reasons to Own Gold.)

GLD Long-Term Chart (2004 – 2018)

 

The SPDR Gold Trust (GLD) came public near $45 in 2004, when the underlying commodity was trading just above $450, and sold off to $41.05 in the first quarter of 2005, marking the lowest low in the past 13 years. It turned higher in the third quarter and entered a powerful uptrend that stalled in the lower $70s in 2006. The fund cleared that level in October 2007 at the same time the equity bull market came to an end, lifting to resistance at $100 in March 2008.

It fell more than 30% during the bear market, coming to rest in the upper $60s while the subsequent bounce reached the prior high in February 2009. A seven-month consolidation completed a historical breakout into the triple digits on the fund and the quadruple digits on the underlying commodity. The rally escalated into third quarter of 2011, topping out at all-time highs near $186 and $1,905. The metal built a descending triangle top into April 2013 and broke down, entering a brutal decline that finally bottomed out at 2009 breakout support in the fourth quarter of 2015. 

The monthly stochastic oscillator crossed into a sell cycle in May 2017, finally reaching the oversold level in June 2018. It has now dropped into the most extreme bearish reading since 2014, signaling a potential buying opportunity for market players willing to take profits at proportional retracement levels. This excludes long-term bulls, who should wait for a breakout above five-year base resistance (red line), now located near $129.

[Learn to analyze the charts of gold and other commodities in the Technical Analysis course on the Investopedia Academy, which includes interactive content to enhance your trading skills.]

GLD Short-Term Chart (2016 – 2018)

 

The initial recovery wave off the 2015 low stalled at $131 in July 2016, generating a pullback that ended near $107 in December. Price action has traded within those range boundaries for the past 18 months, denying profits to long-term bulls and bears. Bilateral swings across the 200-week exponential moving averages (EMAs) during this period are showing no inclination to build directional energy and break out above the long-term base resistance or descend through long-term support.

The fund found support at the 50% range retracement level in December 2017, completed a round trip into the September high and reversed, completing a 100% retracement into the prior low earlier this week. This establishes a rectangular pattern that forecasts a bounce into resistance located at the intersection between the May 1 range breakdown, unfilled May 15 gap, and tightly aligned 50- and 200-day EMAs. In turn, dip buyers at support could profit from a bounce that reaches $122 to $125 before the next major reversal.  A tight stop loss is needed to manage risk in this scenario, placed safely under December and July lows. (For more, see: Gold Price Forecast: Weak Corrective Gains, Defensive Support Still Lacking.)

The Bottom Line

The gold fund has reached support after giving up 100% of the December 2017 into April 2018 rally wave. This location favors a healthy bounce that eventually ends at intermediate resistance in the low to mid-$120s. (For additional reading, check out: Pinch Pennies With a New Gold ETF.)

<Disclosure: The author held no positions in aforementioned securities at the time of publication.>

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